Tuesday, June 29, 2010

This chart shows the average yield on BAA corporate bonds over the past 5 years. The latest datapoint is 6.15% (as of June 28th), which is almost the lowest reading on the chart. Corporate bond yields spiked during the recession, when fear of massive corporate defaults was intense and it was difficult if not impossible for just about anyone to obtain credit. Spreads (the difference between corporate and Treasury yields) are about 100 bps wider today than they were in the tranquil 2005-2006 period, mainly because Treasury yields have collapsed. Borrowing costs for the typical large corporation have not risen at all in five years, but the widening of spreads indicates that expected default rates are much higher. It's not that there is a shortage of money in the system today, it's that fears of losses are still running fairly high. The market seems more preoccupied by fear than by reality.

12 comments:

Big companies have little problems borrowing, just look at BP. I think banks view corporate lending to big firms as conducive to future higher margin fee and trading business. In addition, investors have been taking more risk with yields so low. All good if you're in the Fortune 1000 and need cash.

Unfortunately, it's another story for smaller companies (where a lot of jobs are created). Most of the surveys I have seen show that lending conditions and costs are outright brutal. Scott, do you see this bifurcation persisting?

Clearly there has been a bifurcation between big and small borrowers. But I'm hearing more and more anecdotal evidence that suggests lending to small businesses is picking up, that smaller banks are becoming more aggressive. And don't forget that mortgage rates are just about as low as they've ever been. Banks are not going to sit on reserves that earn only 0.25% forever, when there is lots of money to be made by lending it out.

The Fed already has thrown in the kitchen sink. 2-yr Treasury yields are at their lowest point ever, suggesting that the funds rate is going to be essentially zero for the next year or so. And of course they have pumped in over $1 trillion of reserves to the banking system. Calling for more of the same is almost insanity. If the problem is a weak economy, the solution is not more money and/or lower interest rates. The solution is more likely found somewhere else. Hint: fiscal policy

Scott-You may wish to check out Money Illusion, run by a right-wing monetarist. He makes a good case for monetary action. On fiscal: Don't think it matters that much. Obviously, large deficits need to be brought down, but we are hardly suffering from crowding out or demand-pull inflation at this point.Actually, some of Money Illusion's ideas go glove-in-hand with some of Redleaf/Vigilante.

mr grannis: you have no better clue than anyone on what is the proper price of anything, nay i would say a blinkered view. stop pretending you know more than you do. you are so compromised by relentless optomism. yield.

This is Scott's blog. He has an opinion that he's willing to take his time to share. Personally, right or wrong, I value his input into the global conversation regarding the economy.

A blog is similar to a conversation at a coffee shop or barber shop. It's great when everyone's got an opinion and is willing to contribute to the conversation; it's all about sharing your viewpoint.

Don't be rude by telling someone their opinions, even when backed by solid evidence, are completely wrong. I would never think of saying that in a coffee house and we sure shouldn't say it here.

It's polite to ask questions, even poke holes in research opinions for the sake of furthering the conversation, but some bozos on here are essentially saying "shut up, you're wrong" and that's just... wrong.

Scott, as always, thanks for taking the considerable time required to put your thoughts onto digital paper and share your research. Besides, you've been solidly correct in my book since December, 2008. Thanks.

Keep hoing - the current hic-cup in markets is being played out against a sea of unmerited negativity and vicious sabotage. All that you have said the last 2 years has been nailed on - your analysis is always much much appreciated. Victory is close.

Just a reminder to all that my opinions here are free of charge, and therefore may be worthless. I share my thoughts in the hope that I understand things better than the average person, but there is of course no guarantee that I will be proven right. I also very much enjoy the generally high level of discourse in the comments section, something which does not appear on many blogs that I have visited over the years. I take that as a compliment, and it's a good part of the reason I continue to post.